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Critics say unit leasing slows gas exploration

Amy Fetterhoff shows a map of a proposed federal oil and gas leasing unit for the area surrounding Center Mountain, seen behind her. Fetterhoff is inside a corral with her horse, Betty, on 40 acres along Garfield Creek near New Castle.

When Salt Lake City resident John Jones started seeing considerable natural gas development occur in the Collbran area, it gave him reason for hope.

A 58-year-old truck driver who has two children with serious health problems, Jones has partial ownership in inherited mineral rights beneath about 550 acres there.

But while he and his brother have leased out the rights to develop the minerals for some 20 years, they’ve yet to see any natural gas drilling there. They’d hoped to lease them to a different company, Laramie Energy II, when the existing leases expired this year because of a lack of drilling. But before that could happen, their acreage was included under their existing lease terms in what’s called a federal unit, in this case a 3,480-acre pooling of leases based on an agreement between the Bureau of Land Management and Oxy USA.

Under the agreement, Oxy is required to drill just a well at a time, starting the next one within six months of completing the previous one, across the entire unit until it drills an economically productive well.

After that, it would propose a development plan to the BLM, with royalties to be shared based on percentage of mineral ownership unit-wide or within a smaller designated production pool.

But that arrangement leaves Jones wondering when, if ever, he’ll start seeing any royalties from his lease.

“This is ours, and for us to realize anything from it, something’s got to happen before we pass on,” he said.

IN DEFENSE OF UNITS

U.S. Rep. Scott Tipton, R-Cortez, has heard such concerns from a number of mineral owners and also is critical of the way federal units can limit the pace of drilling.

Tipton spokesman Josh Green said the policy “is just another example of a government agency, in this case the BLM, interfering with job creation and domestic energy production on the Western Slope of Colorado.”

But Colorado BLM spokesman Steven Hall said, “I think the notion that people are going to sit on leases for perpetuity doesn’t make financial sense.”

Encana Oil & Gas (USA) has been granted three federal units for the Collbran area.

Said Encana spokesman Doug Hock, “We wouldn’t have gone through the process of unitization if we weren’t serious about doing this (drilling).”

While federal units such as the ones near Collbran can contain sizable amounts of private land and privately owned minerals, Hall emphasized the BLM can’t and won’t force private minerals into a unit.

What can happen is that private parties may end up in situations in which they have leased minerals, and the leases allow the leaseholders to enter into federal units, he said. But he said the BLM can’t become involved in private contractual matters.

“We have to make decisions on unitization based on what’s in the best interest of the public in terms of managing that mineral estate,” he said.

The BLM contends units reduce environmental impacts by providing for more orderly development unit-wide by one company.

Pointing to the hundreds of productive wells that already have been drilled in the Collbran area, Laramie Energy II questions the BLM’s rationale that it granted Oxy the 3,480-acre unit and a second one in the Collbran area in order to provide an incentive to explore unproven areas.

“How is it in the public interest to allow one of the largest oil and gas companies in the world to exploit the unitization mechanism in order to hold federal leases with known development potential that otherwise expire?” Laramie Energy II says in an administrative appeal of the BLM decisions based on the fact that it was prevented from acquiring leases.

Oxy said in a statement the unit agreements require it to drill “in a reasonable and prudent manner,” and it formed the units “in accordance with the terms of its private and federal leases.”

LEASE UNIT CLAUSES STANDARD

Mary Ellen Denomy, an accredited petroleum accountant who works on behalf of local mineral rights owners, said that when people lease out their rights, they typically don’t notice lease language saying the leases might be included later in either a federal unit or state lease pool.

The chances are energy companies would balk at mineral-owner attempts to remove unit clauses before signing leases, she said.

The problem is that shared royalty revenue from large federal units can result in tiny royalty payments to mineral owners, she said.

“When you get a $10 check, it seems sort of counterproductive for the royalty owner to be in such a big pool,” she said.

Amy Fetterhoff lives on 40 acres up Garfield Creek south of New Castle in Garfield County. She owns the underlying mineral rights and is considering whether to join a 20,000-acre federal unit proposed by Williams.

She fears that because of drilling restrictions on federal land, a lot of the drilling for the unit could occur on private land in her valley, yet she could receive minimal shared royalties if she joins the unit.

“We just don’t want to get slammed and then be sharing everything with the federal government,” she said.

But even if she doesn’t join the unit, she and other residents still could see a disproportionate impact from drilling there, she said.

Williams spokeswoman Susan Alvillar said that with the unit not yet approved, it’s “way too preliminary to draw any of those conclusions” regarding what impacts might occur.

Denomy said the real purpose of units seems to be to let companies hold leases without doing much drilling when natural gas prices are low.

Making matters worse in John Jones’ circumstance, only a small part of the acreage for which he owns mineral rights is part of a federal unit, but he said that has tied up all of the acreage, preventing him and his brother from leasing the rest to someone else.

Jones said he would like to receive royalties that would help him eventually be able to retire and enjoy doing some things he’s never been able to do before.

“I’ve had quite a few hardships in my life. It would be nice to have something pan out for a change,” he said.